Good Debt?? There is No Such Thing

By glblguy

Was reading an article on CNN Money that said the following:

Good debt includes anything you need but can’t afford to pay for up front without wiping out cash reserves or liquidating all your investments. In cases where debt makes sense, only take loans for which you can afford the monthly payments.

Bad debt includes debt you’ve taken on for things you don’t need and can’t afford (that trip to Bora Bora, for instance). The worst form of debt is credit card debt since it usually carries the highest interest rates.

I agree 100% with their take on bad debt where I disagree is on their definition of good debt.

First off, let’s be clear, there is no such thing as good debt. Saying there is good debt, is like saying there are good criminals, or good pirates, or good cigarettes. Debt is bad, be it credit card debt, car loans, mortgage, you name it. It’s all bad.

With that out of my system, what I will concede to is that there are different levels of “badness”. So let’s create a badness meter that rates debt baddest* to bad (Baddest, Really Really Bad, Really Bad, and Bad). Here’s how I see the debt types ranking:

Credit Card Debt = Baddest

Car Loans =Really Really Bad

Trip to Bora Bora = Baddest (most likely it’s on a credit card)

Student Loans = Bad

Mortgage = Bad

Borrowing to Invest = Really Really Bad

Let’s dive in a little deeper…

Credit Card Debt

I probably don’t need to say much here, but this is hands down the worst type of debt you can have. The interest rates are high, you generally have no associated asset, and they are full of “gotchas” like rate hikes and fees. Not to mention they make it far to easy to spend more than you earn and ask you to pay minimum payment that on average will leave you in debt and paying interest for 12 1/2 years.

Car Loans

The CNN money article tells us that paying for a car outright is the best option. I agree, but the article also tells us that most people can’t afford to do this. I completely disagree.

People can’t afford to because they are buying too much car. If you need to use someone else’s money to buy that car you want, than you don’t need it…not to mention you can’t afford it.

Cars are one of the biggest depreciating assets you can purchase. Borrowing money on a quickly depreciating asset doesn’t make good sense, nor does it make mathematical sense.

If you absolutely need a car, buy a used junker. Drive it around while you save some money, sell the junker and buy a nicer car. Keep working your way up.

By the way, the average millionaire drives a used car too. The average “in debt up to their eyeballs”aire drives a new BMW 7-series. One sweet car I’ll admit, but way way too pricey. Tell you what, if you are a millionaire (i.e. your net worth is 1 million or more) and you really want to drive one of these, I won’t fuss at you, as long as you let me drive it.
Trip to Bora Bora

First off, I’ll admit I have no idea where Bora Bora is, but regardless using your credit card to go there isn’t smart. Save up cash for your vacations. Create a special vacation savings fund. I promise, using cash for your vacation will make the whole trip a lot more fun. It keeps you from bringing the vacation expenses home and not having to pay for them for the next 12 1/2 years.

Student Loans

Personally, I don’t think they are necessary, but maybe that’s a topic for another article. I would say that if you are going to borrow money, doing so to pay for your education is probably one of the best uses of debt. What I would ask you though is why can’t you go to the local state school, work a part time job and pay for it yourself? You’ll also be amazed at the number of scholarships available if you do a little digging. Oh, btw I am a manager and interview and hire people all the time. I don’t care what school you went to as long as you can do the job nor is the pay any different.

Don’t get caught up in the mistake of thinking you have to liquidate your retirement fund to pay for your child’s college. It won’t hurt them to pay for it. I paid for some of mine working 35+ hours a week, and I learned a lot more AND appreciated my education more as well.

Mortgage

Considering we are seriously wanting to buy another house out in the country with some land, this type of debt has really been digging away at me. I hate debt, I really do. The reality is houses are expensive and when you have 6 kids like I do, a small house just doesn’t cut it. So I have been doing a great deal of praying, researching, and thinking about the whole mortgage topic.

I have decided, while it’s still bad, it is something I will be willing to do for only one reason and one reason only: The house is worth more than the amount owed. What this basically means is that if I get into a situation where I can’t make the payments, or don’t want the house anymore, I can sell it, and either break even or make a profit.

The trick here is to use a large down payment (20%) AND to make sure you don’t pay too much for the house.

Borrowing to Invest

The last bullet leads me to another quote from the article:

Sometimes the decision to borrow doesn’t hinge on how much cash you have but on whether there are ways to make your money work harder for you. If interest rates are low, compare what you’ll spend in interest on a loan versus what your money could earn if it were invested.

This makes mathematical sense right? And knowing how good we are at predicting the market we know what we can earn right?

I think this advice might be ok for some of the more risky and VERY financially disciplined people out there, but for the general population, this is just bad advice. Let’s face it, most of us are not good at math, otherwise we wouldn’t use credit cards, borrowing $40,000 for a car or SUV that will be worth $20,000 in 2 years (if we’re lucky), or better yet paying 18% interest on that meal at Red Lobster one evening when we didn’t feel like cooking. So for the rest of us, myself included, this is not good advice, not to mention it’s pretty risky.

* Yes, I know this baddest isn’t a real word…I like it anyway :-)

What do you think? Do you feel there is “good” debt? Which debt do you consider the “Baddest” ?


52 Responses (including trackbacks) to “Good Debt?? There is No Such Thing”

  1. Daniel Says:

    I just wanted to say, your blog is great. ;)
    I love your approach to debt and this article, as usual, is fantastic! I know not everyone who deals with “personal finances” pushes “no debt”, but I also can’t stand reading those other blogs! To tell people to make wise decisions in one post and then push the use of a credit card in another is total garbage in my opinion. Keep it up!

  2. plonkee Says:

    Bora Bora is in Tahiti/French Polynesia. Tahiti is an expensive place to go on holiday and Bora Bora even more so.

    I’ve borrowed money, and invested it before. It worked out ok, but I wouldn’t do it if I couldn’t afford to pay the money back without the investment.

    Not everyone is in the position of being able to go to college without student loans. For me, it would have been extremely difficult / impossible without a lot of help from my parents.

    Credit card debt – as in carrying a balance – is definitely not good and to be avoided at all costs. However if you are stoozing, or paying off your credit card in full they can be a useful tool.

  3. glblguy Says:

    @Daniel – Wow, thanks Daniel. I really appreciate that, and enjoy reading yours as well!

    @plonkee – Thanks…thanks, heard people mention it, just didn’t know what or where :-)

    If you don’t mind, regarding your college, why would it have been difficult? My dad paid for some of mine, but had he not been able to I could have paid. I lived at home, and commuted to school. I attended a local division of the a state university to keep tuition down. My last 2 years were paid for through a scholarship.

    re: Credit cards, yes useful tool I guess, but a risky one. I know not everyone subscribes to my “just cut them up” attitude, but for me, I just don’t need them, don’t want them, and wouldn’t recommend them.

  4. paidtwice Says:

    Baddest! yay! I love baddest. :) I actually used baddest in my description of mty own credit card debt in a post a few weeks back.

    Baddest just has so much more “punch” than worst. :)

  5. glblguy Says:

    @paidtwice – It’s actually in the Urban dictionary, so that counts for me ;-) I agree, way more punch…plus it’s just a fun word!

  6. Daniel Says:

    “Baddest” was nearly the best part of the article. :)

  7. plonkee Says:

    @glblguy
    In the UK, until the last couple of years there was no such thing as scholarships.
    Essentially all universities charge the same fees, there is little scope to cut costs.
    Its not really feasible to complete a degree part-time from a top tier university. Mine didn’t really allow it and that isn’t uncommon.
    Living at home requires you to live within commuting distance of a university and even then it can be very expensive to commute.
    Finally, the subject that you pick determines the amount of free time that you have to get a job.
    On the positive side, English degrees only take 3 years to complete.

  8. glblguy Says:

    Interesting…glad you are commenting on here AND part of the M-Network, learning a lot about the UK :-)

    My degree didn’t really allow for it either, but I did it anyway. Didn’t sleep much. I would do classes from 8:00am to about 3:00pm, then head to work at 4:00. Work from 4 – around 9/10 and then do homework until about 2 or 3:00 in the morning. Sleep and get up and do it again.

    I was a Computer Science major, so had a full load, plus I got a math and business minor as well.

  9. RobY Says:

    @glblguy
    I’ll take the bait ;)

    I agree with many of the things you say however I contend that it is not always as simple as good vs. bad debt. Some cases are clearer cut than others such as credit card debt for non-assets (ex. eating out). Other times figuring out if debt is good or bad depends on the situation.

    As you mention, a student loan to go to a overpriced school (compared to a local school) without pursuing scholarships makes a case as bad debt (or at least less than optimal ROI). But if you’ve done all the digging for scholarships/grants and found the school that will give you the best ROI and have to take on debt vs not attend then it could be considered good debt. My point is it depends on the situation.

    Here is a REAL example and I’ll leave it up to you to decide if the debt would be good or bad. I know someone who I will call Jill. She puts 2% in to her 401K which matches dollar for dollar up to 6%. Jill has good credit so she could borrow money if needed to increase her contribution to the full 6% that would get matched. The money would be 100% vested so vesting is not an issue. If Jill did this then she would have an immediate and guaranteed 100% return on this money. Even if she had to withdraw the money early and take the 10% penalty, she would still have more money. Granted, I would first encourage Jill to find wasted money elsewhere in her spending instead of getting a loan. But if a loan is the only way to make this happen then IÂ’ll consider it good debt.

    The same good debt principle applies to another friend of mine who has rental property. He has 30% equity and the rental income pays the debt service plus gives him positive cash flow. Without loans on these properties he might only have 1 instead of 8.

  10. justin Says:

    Mortage debt isn’t always debt. If a mortgage payment is less than the rent would be on the same property, how is that bad debt? Or really debt at all, since you are coming out ahead of renting. Yes, this is the situation in our town. Owning via mortgage is a lot cheaper than renting. We live in a midwest college town.

  11. Lauren Says:

    Wow, great post. Here are my thoughts.

    Credit Card Debt – Right on. Credit card debt is the absolute worst. Can’t say much more about it.

    Car Loans – Not the absolute worst but I do think that everyone should pay for the car they can afford. Make those monthly payments to yourself and buy a nicer car each time. I think its absolutely comical to see all the extremely nice cars driving around in my part of town with “Lease” plates on the back. That’s when you know you have more car than you can afford.

    Vacation – Agreed again. Did you know that for $50 out of each paycheck will give you $1,300. Thats a nice sum of money for a vacation. It won’t be lavish but a vacation nonetheless.

    Student Loans – I have to disagree with you on this one. I don’t see student loans as bad debt. I left school with roughly 15k in student loans (the only debt to my name). Plenty of businesses out there will hire based on experience and being and having qualified skills but in a competitive market having the degree from a good university with a good GPA will put you a notch above the rest. Not to mention the interest rates are not bad on student loans and its a great way for graduates to begin building good credit when they should have very little to their name.

    Mortgage – 6 kids. Wow. Where do you find the time? I plan on paying cash for my first house but I know this isn’t feasible for most so I think as long as you are smart about your loan and put down a sizable down payment a mortgage is not a bad thing.

    Borrowing to Invest – Agreed. Ouch. Don’t do it. Way too much risk involved and you’ll have to earn a significant amount on return to compensate for the interest.

    Overall I think a mortgage is good debt if you are not purchasing more house than you can afford. And I think student loans is not bad debt. Not good debt either. So I guess neutral. Just my opinions.

  12. Lauren Says:

    @RoBY – Since when is taking money out of your 401k only a 10% hit. I’d always heard 25% although I’ve never done it.

  13. RobY Says:

    @Lauren
    The 10% hit is the IRS early withdraw penalty if the money is taken out before retirement. Your employer also probably has to withhold money for taxes.

    Since the taxes would have been due either way, I didn’t include them in my example above. Lets do that real quick. To make numbers easy I’ll use 100,000 as the income so Jill needs to contribute an extra 4,000 per year. Since the contribution is before tax her taxes will be reduced at the high end of her tax rate (lets say 25% which means 1,000 tax deferral). Therefore, she needs a 3,000 loan to offset the 4,000 contribution which turns into a 8,000 contribution once matched. I’m using easy (and big and approximate) numbers here but I hope it illustrates the point.

  14. RobY Says:

    @Lauren
    Opps I forgot to finish my example.

    Later if Jill needs to withdraw money to payoff the 3,000 loan then she will need to withdraw maybe 4,400 to cover the 3,000 plus deferred taxes of 1,000 plus 10% penalty.

    Ideally instead of making an early withdraw, she would tighten up and pay off that loan by finding wasted money in her budget. Either way though borrowing in this case was better than missing the opportunity so as a last resort that is what I would do.

  15. glblguy Says:

    @RobY – Hmmmm, you figured me out…have to come up with another tactic ;-) I agree it’s not as simple as good and bad, so I made it simple, it’s all bad :-)

    Your examples are thought provoking, and I can see the math around why these makes sense…they are risky though. What if you loose your job tomorrow? What if you can’t rent the house…or can’t make the payments? To be debt is a burden that isn’t necessary in most cases. There are always other options (like saving and paying cash). For the very disciplined, math works, for the rest of the world it doesn’t.

    @justin – debt is when you owe somebody else money. With a mortgage, you owe a bank money.

    @Lauren – thanks for your perspectives. Regarding student loans, it’s still debt and something that follows you after you graduate. You guys know me, debt is bad period end regardless of how you justify it. But I realize I am not in the norm on this.

    I would argue as well that if a company you want to work for is hiring you based on the college you went to, than that might not be a place you want to work. I have people working for me now that went to much better “name” schools that I did. Quality of education does not equal cost/name of school.

  16. RobY Says:

    @glblguy – I’m glad you found my example thought provoking as that was the intent. I’m actually not a big fan of debt because it can be risky if not used wisely however it is merely a tool.

    Someone once said – Money is not the problem, you are :)

    I would also say, Debt is not the problem, you are.

    The question of risk is a whole other topic and also must be considered. My friend who buys property at 70% of fair market value knows he can sell it very quickly if needed. His risk is limited because he has knowledge and experience in this field and bought the properties the right way using debt as a tool.

    Losing your job doesn’t change my 401k example (no forced early payback problem) however that is a risk that everyone needs to be prepared for too. I know you’ve covered that one before.

    You also said: “There are always other options (like saving and paying cash). For the very disciplined, math works, for the rest of the world it doesnÂ’t.”

    I will counter that saving and paying cash take much discipline too. However, that is the safer path and I agree that your approach should be mastered first. After becoming disciplined in that way then a person might be ready to use debt in a disciplined way.

    It a journey!

  17. Justin Says:

    @justin – debt is when you owe somebody else money. With a mortgage, you owe a bank money.
    Then any living arrangement where you don’t own the place outright is debt.

    A lease is debt. Once again, if you can buy with mortgage for less than renting, how is that mortgage bad debt?

  18. glblguy Says:

    Justin, would seem my definition wasn’t specific enough…to me debt is when you get cash or money for something to buy something you can afford to pay cash for.

    A lease is different, you don’t own the product and get stop using it whenever you wish, except for some potential requirements you might have due to the contract. They are different. But I think you know that already.

  19. Justin Says:

    Of course I know that already, however the reality of borrowing to purchase a residence is necessary for most people. Assuming they don’t spend more than they can afford, and don’t live in the areas with ridiculous house prices (some of the higher populated states, for sure), it isn’t bad debt. The protestation that all debt is bad is close to bad financial advice in this case. In the end you end up owning your house and housing payments come crashing down to only property taxes, insurance and maintenance. Even the hero of the all debt is bad crowd concedes that a mortgage is a necessity in many cases.

  20. glblguy Says:

    I agree it’s sometimes necessary, and I succeeded to that it my article. I think the point is where do you draw the line on e bad vs. good. I still think a mortgage is bad compared to the alternative of paying cash, so in that sense a mortgage in my opinion is bad. Is it s necessary evil? Maybe, it would depend on your situation.

    Whether deemed bad advice or not (and I would argue advice is neither bad or good, its just advice and if it works for you great, if not that’s fine too).

    I also agree with the hero that all debt is bad…and I conceded when I said: I have decided, while itÂ’s still bad, it is something I will be willing to do for only one reason and one reason only: The house is worth more than the amount owed.

    Note “the hero” never said he didn’t think it was bad, he just says he’s not going to hold it against you. After some thinking and researching, I have gotten there as well.

    I know we don’t agree on this topic, and haven’t in previous posts, but I do appreciate that you challenge me and you make me think through my thought process more. Enjoy your comments and our thought provoking discussions :-)

  21. MITBeta Says:

    @glblguy: First let me say that I have enjoyed reading your blog.

    With that said, I find this particular entry to be judgmental and it takes a very black and white view of a grayscaled topic.

    Credit Cards: I’ll give you this one. Although I will note that there are circumstances where it makes sense to take on debt to finance an appreciable asset. In my case, I have financed improvements to my rental property at very low rates. These improvements enable me to earn more income from the property than I otherwise would — so much more that the debt service is more than worth it.

    Car loans: There are always going to be circumstances that will require cars that cannot be paid for in cash. How do you move a family of 6 around? In a junker? What if you only had 6-9 months of warning that your family was about to grow dramatically? I agree with the general premise that depreciable assets should be bought used if possible and in cash, but you paint with a very broad brush when you suggest that no one needs to purchase on credit.

    Vacations: I’ll give you this one with no extra commentary.

    Student Loans: I applied to and was accepted by 5 different schools, all of them great. If I had had to choose which school to attend based purely on economics, my choice would have been the same. The name of the school on the diploma I received has had some role in each and every job that I have had in my working career, and that for me has been worth the $20k – $30k in loans that I took on as a result of going there. I feel that I got more out of the educational experience by spending more of my time studying than working just so I wouldn’t have to take on more debt. To suggest that those who choose to do other than you did are somehow being “bad” is silly.

    Mortgage: Most people, even the most prodigious of savers, will never be able to save the full cost of a house, especially when they are paying rent at the same time. You know it as well as I do. This is one of those cases where most of the time the math works out, too. Over the course of time it takes a normal person to pay off a 30 year mortgage, the home’s value increases beyond the sum total of all of those loan payments.

    Even if I had the cash to buy a house purchase outright, given that I am still quite young, I don’t know whether the opportunity cost of that money being tied up in an asset that typically appreciates at 3% per year is worth it compared to the work my money could do for me elsewhere.

    Borrowing to invest: Again, carefully weighing the risk versus reward and preserving an exit strategy can make this a very valuable tool. It’s always good to have more tools in your toolbox and the experience and wisdom to know which tool is right for which job.

    “I would argue advice is neither bad or good, its just advice and if it works for you great, if not thatÂ’s fine too”

    Substitute the word “debt” for “advice” here.

    I think that what this all comes down to is a matter of where you are on the journey. My observation of any type of epiphany followed by step change is that the first steps are something akin to zealotry: all debt is bad, all fat is bad, all (insert vice of choice here) is bad. Later, as people begin to understand the true nature of where they went wrong with whatever overindulgence, they learn to see in shades of grey and eventually color and come to appreciate that it wasn’t food, or debt, or whatever that was the problem, but rather how those items were used and the ignorance of the cost that was the problem.

  22. justin Says:

    Most people, even the most prodigious of savers, will never be able to save the full cost of a house, especially when they are paying rent at the same time.
    Too true.

    And when you consider that rent goes up every couple of years and the mortgage stays the same, it’s an even simpler decision when renting and buying cost the same at the outset

  23. glblguy Says:

    MITBeta, glad you have enjoyed reading it. My intent wasn’t to be judgmental, my intent was to express my personal view on the topic and to provide my readers with my perspective. It’s difficult to express a viewpoint that differs significantly with societies norms without coming across “silly” or judgmental. Neither was my intent.

    I think what needs to be understood here is that my foundation for these beliefs is most likely very different than yours. My foundation roots in biblical scripture, and it is pretty clear that debt of any kind is bad. The bible has nothing good to say about debt, hence the position I take on it. I would not expect this to line up with more worldly views.

    To address a few specific points you made:

    I disagree with your statement that there will always be situations where a car cannot be paid for in cash. A family of six can buy a used mini-van. Regarding family growth, sell what you have and buy a car that holds more people. I do paint a very broad brush, as I am trying to attack the norm. The norm is finance a new car for 5-7 years.

    Regarding student loans, I wasn’t trying to imply that anyone that did other than myself was bad. You twist my words. What I did say was that student loans are debt, and thus not good and therefore bad. I did give it a pretty high score on the “bad” gauge. It is not something I would recommend anyone do. Seems maybe I touched on a sensitive subject with you. Remember what you do (or did) was your choice, if you are comfortable with it, that’s fine, doesn’t mean I have to agree. Regarding the name on my diploma, that has never made a difference in any part of my career. Maybe it differs based on your career and major.

    Mortgages, I conceded on this one. I don’t like it, but you are correct it is difficult to save for a large purchase like a home. I think I said all of this in the post.

    You make the assumption that my epiphany is what caused this. No, what caused this was being spending an enormous amount of time reading scripture and studying the bible on personal finance and what God would recommend.
    Another factor that plays into my “debt is bad” mindset is risk, which you don’t account for. Bad things happen in life, unexpected life changing things, debt is a burden, debt is a risk. I don’t want either of these things in my life.

    Call me crazy, silly, etc. My opinion is that debt is bad, and is not near as required as the world seems to think it is, and I want people to realize that. If it works for you, that’s great, but you won’t see me recommend it or write an article that would advocate using it unless there was no other feasible alternative. I realize I am not in the “norm” here, but I’m ok with that.

  24. glblguy Says:

    Justin, one big difference in renting owning…risk. If something unexpected happens in your life (i.e losing your job, getting injured and unable to work, etc) with rent you can just move out and stop paying it. With a house, you are stuck with mortgage. Maybe you can sell it and profit, maybe you can’t. Lots of variables here. With rent though, you don’t owe anyone anything.

    Not saying I advocate renting, but in many situations it is the best choice, and these least risky.

  25. justin Says:

    @glbguy: True enough, however, how do you reconcile owing outright vs mortgage when it comes to risk? The risks are very similar, especially the longer you pay down a mortgage, or if you put down the 20%. Of course, with my current situation my wife’s salary, which is the smaller, can cover all the bills including mortgage. So should either of us be out of work for a while we’re ok, have to scrimp a little, but life’s tough.

  26. paidtwice Says:

    My mortgage payment might stay the same – but the property taxes and insurance I have to pay to escrow every month can (and do) go up. So my monthly payment isn’t static for the life of the loan. Just a random comment thrown in there. lol

    I have a mortgage so I’m not saying it is a bad thing. Just something I never considered (the taxes/insurance etc) when I first thought about buying. I’m a wee bit slow heh.

  27. glblguy Says:

    Not sure if I understand what you are saying Justin. If I own outright, i.e. pay cash…there is no risk. It’s my house, I own it, no payments and nobody can take it away from me. All I owe is taxes and insurance, just the cost of ownership. However if I have mortgage and can’t pay, they can take the house and take legal action. Have a family of 8 with me being the sole bread winner, I am far more attuned to risk than most people.

    Late last year I got just a taste of what life would have been like without a job…it wasn’t pretty, as a result my risk meter is far more sensitive now…funny how that works huh? :-)

  28. glblguy Says:

    I have a mortgage was well, so in some sense I am calling the “pot calling the kettle black”. But like I said, in many cases a mortgage seems like a necessary evil. I hate having a mortgage, loath having to make the payment, and dislike the fact that the bank could take my home if I couldn’t pay. But, it was a choice I made so hold no on but myself responsible.

    Just because you have or do something doesn’t make it a good thing.

  29. justin Says:

    @paidtwice: Yep, however taxes and insurance may go up, they are still a small fraction of the mortgage payment and would be accounted for within rent as well.

    @glbguy: If you own outright there is still risk. You can still lose your job and have to move to get a better one, property values can get quite a lot lower, property taxes can skyrocket and you be unable to pay them and have your house taken away that way. Also, if you have a house and have over 20% or so into it, you can more than likely sell to recoup the mortgage balance.

  30. glblguy Says:

    Sure, there is risk in everything if you look hard enough. You just have to find where that line is for you. I’d rather own a house and not pay payments. Will that ever happen, probably not, but I can hope. Even with owning are their risks, sure…but I would argue they are far less.

    Property taxes (at least where I live) don’t generally shoot up by a large percentage suddenly. Ff my property value goes down, well that’s ok as I can still live there. I do agree on being able to sell, and again made that concession in my article. If you put 20% down, while not the best option, it is an option I’d be ok with. I think that is actually what we are going to do here in the next year or two.

  31. Debt Free Revolution Says:

    Since the trackback didn’t work right, let’s try again :)

    Gather Little By Little wrote an excellent piece for this week’s Carnival of Debt Reduction called “Good Debt?? There Is No Such Thing” that I whole-heartedly agree with. (Full post by clicking on my name)

  32. Wanderer Says:

    Key Behavior #4: Understand That Credit Is The Opposite Of Saving.
    We’re in complete agreement here. All debt is bad, some types “badder” than others. My take:
    Credit Card Debt: Baddest? Perhaps. My word is STUPID (in all caps). Apologies if anyone is offended by that but I’ve a fair amount of personal experience behind that feeling (STUPID with zeros after it, as Dave R. says).
    Car Loans: Same as credit cards. The loss in depreciation is just as bad as the hidden fees and other garbage involved in CC fees. As you need transport in order to be able to work and earn income, in most cases, buying cars on credit puts your very ability to earn a living at a certain degree of risk. I rank this one Baddest/Stupid as well.
    Mortgages: Bad, but sometimes necessary. Simplest, shortest term possible, flat interest rate, 20% (or more!) downpayment, and don’t tie up more than a fourth of your budget in housing. It can often be a better idea to rent for a while, especially if you have other debt and stuff cluttering the water around you.
    Student Loans: Insidious. Too easy! I firmly believe it is built into our psychology to assign value based upon difficulty of achievement. Having to work your way through school as you did, makes you appreciate the education more. I am a restaurant manager and do not have a degree. Three other managers in our restaurant have degrees, and I started out at the same salary they did. They earn what they earn now because of what they have achieved on the job, not because of what their piece of parchment from the university says. The value of education lies in the knowledge gained that can be applied in the real world. You can get that sort of knowledge just as easily in a Public college as you could from a ritzy private college.

    Wanderer – Enjoy The Ride!

  33. glblguy Says:

    Wanderer, thanks for jumping into the fray. I’m sure your comments stir come additional comments ;-)

  34. Jon - Art of Money Says:

    I’m dating myself here, but a good number of years ago when banks were paying 14% interest, my sister in law who was going to college borrowed every penny she could in interest free student loans. Took the money and put it into a bank account. By her second year she was able to live off of the interest without touching the principle. After she graduated she paid the principle back, just before the interest free period expired.
    Good Debt!
    There are many circumstance where I can borrow at one rate and through financial skill and knowledge be guaranteed a return higher than the interest payments. That is not only good debt, it is the way rich people get wealthy in many cases.

  35. glblguy Says:

    Jon, thanks for stopping by. I know people do it, and you can make money, but I disagree it’s good debt.

    What you aren’t factoring in is the risk. I would also question any circumstance where you are “guaranteed” a return.

    While it might be how some people get wealthy, I would argue many more go broke than get rich.

    Really boils down to what you are comfortable with, and I just wouldn’t do it. But I am a low risk person, just learned that being risky generally more painful than rewarding.

  36. Justin Says:

    @glblguy said: What you arenÂ’t factoring in is the risk.

    I don’t think the risk in these cases is very high. If you are guaranteed zero percent interest rate for a certain period and you can get more than that in a savings account that is FDIC insured, the risk is very minimal. You just need to pay your bills on time. You always have the principal to pay it back should issues arise.

  37. Jon - Art of Money Says:

    Thanks glblgy, nice site. I agree that a lot go broke, that is because they are gambling, not investing. An investor takes the time to get properly educated, studies every investment thoroughly and then factors all possible risks into an analysis if the investment. If the numbers make sense, including the risk factors, then debt or no debt it is a deal that is worth doing.
    There are risky investments, but most of the time it is the so called investor that is the real risk.
    Two nights ago in my investment club we had a proposal from a CEO of company with annual profits of 500 million dollars (the CEO was there in person). The company is a world leader in their business and the industry sector is extremely stable. He was offering a two year corporate bond that paid 14-16% annual return, paid monthly. In ten years of doing business, they have never missed a monthly payment or failed to return the investor’s capital.
    I have 2 credit cards offers on my desk that will allow me to borrow the $25,000 @ 6.5% for 2 years. By my calculations I can make about $200 a month for two years by doing nothing. I like deals like this and I find them a lot less risky than having a job, for example. The risks of having a job are many, primarily to your health and sanity :) but high tax rates and layoffs or outsourcing are also risks that employees face.
    Anyways, good post, excellent point of discussion. I just wanted to present an alternative view, which I realize is not for everyone. I have seen many times first hand that debt used as leverage, combined with financial education can lead to financial freedom. To me money is really a game, and even going broke is part of the game and not really to be dreaded. You can go broke, and I have come very close, and it is not the end of the world. Often people who have gone broke have a new appreciation of money and go on to do very well.

  38. glblguy Says:

    @Justin – I see what you are saying and see how it could work, but your point about paying on time is important and not something people in general are real disciplined on. I think Jon’s comment really backs up what you are saying.

    @Jon – Great points Jon, and I do believe you bring a really interesting and good perspective. For me, this wouldn’t be something I would want to do, but I can see the attraction and how if you know what you are doing it could be a good investment. Thanks for taking the time to write such an excellent comment. Thanks also for the comment on the site, I appreciate it.

  39. David Makes Cents Says:

    Sweet you paid for your own college too. I feel like I am the only one I know who has to do that. Every1 elses parents seem to pay for it. Or they are just taking out loans. I now have a higher level of respect for you. :)

    I disagree, there is good debt. I would take $1,000,000 at 1% interest then just put it in the bank and get money off the difference. I know this is kinda silly, but hypothetically it is good debt. Some people actually make money like this by using 0% apr intro rates on cc and then paying it off when the intro rate expires. Its called credit card arbitrage. Its a little risky but some peeps make a few thousand a year from doing it.

  40. Make Friends, Earn Money Says:

    I agree that there is no such thing as good debt, but there is such a thing as necessary debt, a mortgage for example. I think the key here is being wise about what type of debt we take on and not borrowing beyond what we know we can sensibly manage to afford. I also agree that borrowing to invest is a big no no.

  41. Damien Barber Says:

    Hey, I know this is years after this post, but I thought you might be interested in checking out my latest blog post

    http://barbersblog.spaces.live.com/blog/cns!8DDE0E8AAFE427F5!216.entry

    I have a similar view to you, except that I do consider Student Loans to be “good” debt (to a certain degree) because it is an investment. You may be spending 20-30k to get your degree, but then you can usually turn around and pay that off in a couple years once you are making $30-60K (or more depending on your degree).. prior to getting the college education you would have been stuck earning $15-20K for the rest of your life or until you could slowly save up to go to college… in such a case taking on debt is better than the alternative and leads to you earning more money quicker!

    As far as mortgages go, I see them as good debt so long as you stick to a house that can be paid off in $10-15 years (I did the math and discovered that a 30 year mortgage will lead you to pay DOUBLE the amount your house is worth as the Interest would match the cost of the house itself).

    However, I myself plan not even to use this debt as I figure I can rent for about the same cost or less over 10 years as the interest would cost me towards my house while saving up the money to buy the house… and I would not have to worry about property tax or maintenance costs/ homeowner’s insurance during all this time (making renting cheaper than the interest and other cost).

    So I disagree with the person that said a person cannot save up money to buy a house as you can rent for approximately the price of interest on a house (at least if you don’t require a lavish house/ apartment that’s gonna cost you $900/mo in rent).

    I also see no interest store credit cards as “good debt” so long as you use them sparingly and have a plan to pay them off before the no interest period wears out. I used this kind of debt to get my wife’s engagement and wedding rings, and paid them off shortly after we got married to avoid any fees.

    Car loans, I see as neutral and can vary depending on circumstances as to whether you should take on such debt. Pretty much any other debt I see as Bad to Super Bad.

  42. Garen Says:

    Yes, having debts are bad and some may be even worst than most as you clearly pointed out in your article but Iíd rather see things in a positive light.
    This means for people who may be at one point in their lives financially challenge due to a mixture of circumstances and unwise decisions seeing things in their right perspective can attract a solution to the problem rather than wallow in self pity or unending remorse and regrets for what ifs. Home mortgage may be categorize as your present debt but in the long run you will gain something; your own home in the future.

    For those who have debts because they are starting on a business which by the way does not instantly gave you a return of investment (not unless after a few months of successful selling) then this may be bad debt at first glance but ultimately it is better to be the boss than merely being the employee so taking the risks may be beneficial.

    Education loans may be bad debt now but in the future if you are armed with the right skills and knowledge then you still win in more ways than one.

  43. Nightvid Cole Says:

    Why is your house too small for 6 kids? In India they raise families that size in spaces the size of your bedroom just fine.

    Is your house too small or have you just fallen into the trap of too much stuff/poor space management?

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